Consumption Growth in a Booming Economy: Taiwan 1976-96

57 Pages Posted: 28 Jun 2001

See all articles by David J. McKenzie

David J. McKenzie

World Bank - Development Research Group (DECRG); IZA Institute of Labor Economics

Date Written: May 2001

Abstract

Consumption and income have both grown rapidly in Taiwan over the past forty years, with younger birth cohorts experiencing faster growth. The long upward trend in consumption presents a strong challenge to the consumption smoothing predictions of the Permanent Income Hypothesis. We investigate the extent to which consumption theory can account for this trend in an environment where a large majority of households have high savings rates. Household survey data from 1976-96 are used to estimate dynamic pseudo-panel models with inter-cohort heterogeneity. We evaluate the impacts on consumption of migration, mortality, household composition, liquidity constraints, unanticipated aggregate shocks, hyperbolic discounting, habit formation and precautionary saving. Taiwanese consumption growth is found to result from high levels of prudence, with the faster consumption growth of younger cohorts attributed to their greater participation in industries with more earnings risk.

Keywords: consumption growth, pseudo-panel, prudence, Taiwan

JEL Classification: O12, O16, E21, C23

Suggested Citation

McKenzie, David John, Consumption Growth in a Booming Economy: Taiwan 1976-96 (May 2001). Available at SSRN: https://ssrn.com/abstract=275176

David John McKenzie (Contact Author)

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

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